One of the more exciting exit alternatives for all stakeholders, is the sale of the company to its management and/or employees. The key advantage for the selling shareholder is that there is a known buyer. There is no company disruption associated with the courting of multiple buyers. Also, in the case of a sale to all employees, there may be substantial tax advantages for the seller. For the employees, the transaction is motivational since every employee will own a piece of the company. Lastly, all other outside stakeholders are dealing with the same decision makers, so they are happy too.
So what are the challenges. First, management is hired to work on behalf of its shareholders. In an employee transaction, they are on the other side of the negotiating table. The board of directors must establish clear ground rules and a time frame for for assessing this type of transaction. You don’t want the management team on the other side of the negotiating table for an extended period of time. Second, it is often tough to assess fair market value. Your best source for determining fair market value is your management team, but they are on the other side of the negotiating table. An outside, arms length advisor is often needed to assess fair market value. Lastly, shareholders must assess whether the management team can raise the transaction financing.
The key to selling to your management team and/or employees is advance planning. In the company’s formal strategic planning process, the management team must objectively answer the following questions for its shareholders.
- Can we truly pay fair market value?
- Can we raise the funds to close the transaction?
- Is our management team solid? Can we manage the company with leverage?
- How will leverage inhibit our growth plans?
- How much time do we need to make this transaction happen?
Establish a time limit for assessing this type of transaction. If you cannot structure a transaction within the time limit, then get back to work for your shareholders.